The Federal Reserve Board announced on Monday that it is seeking public comment on a policy statement proposal that lays out the framework the Central Bank would follow in setting the capital requirements for internationally active banks known as the Countercyclical Buffer, or CCyB.
The CCyB is a macroprudential tool designed to help banks absorb shocks that result from declining credit conditions, according to the Fed. The buffer would raise capital requirements for banks that do business internationally in times of elevated risk of above-normal losses, thus increasing the resilience of the financial system.
According to the Fed, the proposed policy statement provides background information on the factors the Fed evaluates as it determines settings for the CCyB. These may include but are not limited to leverage in both the financial and nonfinancial sectors; maturity and liquidity transformation in the financial sector; and asset valuation pressures, the Central Bank said.
“The Board also would monitor many financial and economic indicators and consider using different models to evaluate risks to financial stability,” the Fed stated in its announcement. “For example, the Board could consider indicators of the risk-taking, performance, and the financial condition of large banks, and combinations of the private nonfinancial credit-to-GDP (Gross Domestic Product) ratio with price trends in residential and commercial real estate.”
The range of indicators the Fed would consider when setting the CCyB would change over time due to constantly evolving economic and financial risks. The buffer would apply to banks that are subject to advanced approaches capital rules, which are typically banks with more than $250 million in assets or $10 billion in on-balance-sheet foreign exposures. The CCyB would also apply to any depository that is a subsidiary of a bank that is subject to the CCyB.
According to the Fed, the CCyB is calculated based on private-sector credit exposures in the U.S. and it would range from 0 percent or risk-weighted assets in times of moderate financial system vulnerabilities to up to 2.5 percent during times of significantly elevated vulnerabilities, once it is full phased in. Should banks not meet the buffer, they would be subject to restrictions on capital distributions and payment of discretionary bonuses, according to the Fed.
The Fed invites comments on the proposed policy statement until February 19, 2016. At the same time the Fed released the framework for comment, the Fed voted to affirm the current CCyB level at 0 percent. Banks would have 12 months before the increase became effective should the Fed decide to modify the CCyB level, unless the Fed establishes an earlier effective date, according to the Fed’s announcement.
Click here to view Regulatory Capital Rules: The Fed’s Framework for Implementing the U.S. Basel III Countercyclical Capital Buffer.
Click here to view the Fed’s Framework for Implementing the Countercyclical Capital Buffer.
Click here to view the 2015 Banking and Consumer Regulatory Policy.